Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Key points:
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
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Macro:
Macro events (times in GMT): Switzerland Oct. CPI (0730), US Oct Nonfarm Payrolls Change and Unemployment Rate (1230), US Oct ISM Manufacturing (1400)
Earnings events:
For all macro, earnings, and dividend events check Saxo’s calendar.
Equities: US markets saw significant declines, with the S&P 500 dropping 1.8%, Nasdaq 100 down 2.4%, and Dow shedding 378 points, primarily driven by disappointing guidance from Microsoft and Meta, which highlighted high costs associated with AI investments. In corporate earnings, Apple beat revenue and EPS estimates but reported lower net income due to a tax charge, leading to a 2% drop in after-hours trading. Amazon’s results exceeded expectations on both earnings and revenue, lifting its shares by 5% post-market. Japanese markets slipped 0.5% following US tech earnings, with chip stocks like Hitachi and Renesas underperforming despite strong gains by Advantest on AI demand. In Europe, shares declined amid mixed earnings and inflation concerns, with Microsoft and Meta's outlooks impacting tech shares such as SAP and ASML.
Volatility: The VIX rose 13.81%, reaching 23.16, indicating increased market caution. The VIX1D, a measure of one-day volatility, jumped 41.01%, signaling heightened short-term uncertainty. Implied volatility remains elevated as the SPX and NDX are set for potential moves of 52.81 points (0.93%) and 254.27 points (1.28%), respectively, based on options pricing. Notable options activity includes MSFT, META, and INTC, reflecting the impact of earnings. Today, the release of Nonfarm Payrolls (NFP) data is expected to be a critical factor influencing market sentiment, as investors look for clues on economic resilience amidst inflationary pressures and potential Fed rate adjustments.
Fixed Income: UK markets saw another day of turmoil as gilts dropped, with 2-year and 10-year yields both hitting 4.53%, driven by reduced expectations of BOE rate cuts after the government’s Autumn budget. Bunds, OATs and BTPS held steady, outperforming gilts. U.S. Treasuries ended slightly higher yesterday, recovering from earlier losses caused by a selloff in UK gilts. The gains were led by longer-term bonds, flattening the yield curve. Economic data, like lower jobless claims and the PCE index, had little impact on the market, as traders focused more on European developments. Today market’s focus is on the nonfarm payrolls ahead of next week’s FOMC meeting.
Commodities: Gold's near USD 60-dollar correction yesterday was triggered by profit-taking amid a less dovish Fed. This shift, following a string of strong US economic data, temporarily removed focus from political concerns—including Trump's policies and their potential effects on debt and inflation. Silver mirrored gold, falling more than 3% before reaching a key support level that managed to attract fresh buying. US natural gas extended its weekly decline to over 12% as stockpiles rose above the five-year average amid warmer weather forecasts, indicating sluggish demand for heating fuel. Crude oil found support from strong US economic data, China's stimulus, and Iran’s threat of an imminent retaliatory strike against Israel. The focus now turns to the US jobs report and the countdown to Tuesday's US election.
Currencies: Sterling was the chief focus in FX as it dropped sharply in a follow-on reaction to the UK budget unveiled on Wednesday. The Euro/Sterling exchange rate rose through the important 0.8400 area (a prior major cycle low from the summer) as the market sees the heavy spending in the budget as possibly stagflationary, judging from the sharp rise in UK rates all along the UK yield curve and the sell-off in the currency and the country’s equity market. Elsewhere, the USD was sideways ahead of today’s October jobs report and next Tuesday’s election, as well as the Thursday FOMC meeting next week.
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